Fed Housing Policy Played Central Role In FHA Fiasco

Most FHA mortgages today are based on shaky underwriting — the chief cause of the financial crisis. Pictured is a foreclosed property in... View Enlarged Image

If the near-insolvent Federal Housing Administration needs a federal bailout like its cousins, Fannie Mae and Freddie Mac, taxpayers can again blame federal housing policy.

Washington relaxed FHA's underwriting standards before the subprime mortgage crisis and wound up insuring billions of dollars in bad loans. And now the agency continues to engage in risky lending.

Among other things, it's increasingly backing new home loans to so-called rebound borrowers who recently defaulted on past mortgages. Delinquencies are so high it's extended the grace period for repayments on troubled loans to a full year.

Under orders from the Housing and Urban Development Department, which controls FHA, the agency is allowing failed borrowers to get loans just three years after foreclosure with as little as 3.5% down and credit scores as low as 580. (Sub-660 is deemed subprime.)

As many as two in five newer FHA-backed loans bear subprime attributes — namely, weak credit or high debt ratios, according to former Fannie Mae Chief Credit Officer Edward Pinto.

Traditionally, FHA has insured lower-income homebuyers. But after the housing bust, the agency expanded its role in the housing market multiple times as Fannie and Freddie went into receivership.

In 2007, FHA backed 4% of all home loans outstanding. Now it insures almost one-fifth, with obligations totaling $1.1 trillion.

Taxpayer Exposure

Its ballooning share of new-home purchases highlights just how key FHA has become to the housing industry — and how much more exposed taxpayers are as a result.

FHA now insures roughly 25% of all new mortgages, up from just 6% in 2007. Over the past year, FHA has provided credit for close to 60% of all African-American and Hispanic homebuyers.

Take Hermes Maldonado. The Honduras immigrant recently qualified for an FHA loan for a home in the Los Angeles area — despite two prior foreclosures and two bankruptcies.

"After everything that happened, thank God I was able to buy another house," Maldonado told the Los Angeles Times in Spanish.

Most FHA mortgages today are based on shaky underwriting — the chief cause of the financial crisis. And the share of shaky loans with 5% or less money down has jumped to close to 70% from 58% in 2008, according to an independent auditor's report.

The typical FHA loan has a 3% down payment. That means borrowers are entering the government mortgage program without a lot of equity. With home prices still soft and the job market still fragile, they are skating on thin ice.

Most FHA mortgages today are based on shaky underwriting — the chief cause of the financial crisis. Pictured is a foreclosed property in... View Enlarged Image

If the near-insolvent Federal Housing Administration needs a federal bailout like its cousins, Fannie Mae and Freddie Mac, taxpayers can again blame federal housing policy.

Washington relaxed FHA's underwriting standards before the subprime mortgage crisis and wound up insuring billions of dollars in bad loans. And now the agency continues to engage in risky lending.

Among other things, it's increasingly backing new home loans to so-called rebound borrowers who recently defaulted on past mortgages. Delinquencies are so high it's extended the grace period for repayments on troubled loans to a full year.

Under orders from the Housing and Urban Development Department, which controls FHA, the agency is allowing failed borrowers to get loans just three years after foreclosure with as little as 3.5% down and credit scores as low as 580. (Sub-660 is deemed subprime.)

As many as two in five newer FHA-backed loans bear subprime attributes — namely, weak credit or high debt ratios, according to former Fannie Mae Chief Credit Officer Edward Pinto.

Traditionally, FHA has insured lower-income homebuyers. But after the housing bust, the agency expanded its role in the housing market multiple times as Fannie and Freddie went into receivership.

In 2007, FHA backed 4% of all home loans outstanding. Now it insures almost one-fifth, with obligations totaling $1.1 trillion.

Taxpayer Exposure

Its ballooning share of new-home purchases highlights just how key FHA has become to the housing industry — and how much more exposed taxpayers are as a result.

FHA now insures roughly 25% of all new mortgages, up from just 6% in 2007. Over the past year, FHA has provided credit for close to 60% of all African-American and Hispanic homebuyers.

Take Hermes Maldonado. The Honduras immigrant recently qualified for an FHA loan for a home in the Los Angeles area — despite two prior foreclosures and two bankruptcies.

"After everything that happened, thank God I was able to buy another house," Maldonado told the Los Angeles Times in Spanish.

Most FHA mortgages today are based on shaky underwriting — the chief cause of the financial crisis. And the share of shaky loans with 5% or less money down has jumped to close to 70% from 58% in 2008, according to an independent auditor's report.

The typical FHA loan has a 3% down payment. That means borrowers are entering the government mortgage program without a lot of equity. With home prices still soft and the job market still fragile, they are skating on thin ice.

Studies show borrowers who pay low or no down payment pose a higher risk of default.

FHA began increasing its share of loans with low or no down payments several years before the crisis. It even let homebuyers use "gifts" from family and nonprofit groups like Acorn to cover 100% of out-of-pocket costs.

No minimum FICO score was required — today it's 500 — and it was perfectly acceptable for people with no established credit whatever to receive a loan.

In 1999, the agency nearly doubled to 44% its share of loans with 3% or less down. The share averaged a whopping 51% between 2000 and 2008. Predictably, foreclosure starts on FHA loans soared to nearly 5% from about 2% over that same period.

Starting in the early '90s, HUD enlisted FHA in its "revolution in affordable housing" along with Fannie and Freddie. In fact, the agency put the three in direct competition for high-risk subprime loans to help meet affordable-housing goals for "the underserved."

"HUD was coordinating these policies in the interest of creating competition between FHA and (Fannie and Freddie)," said former Financial Crisis Inquiry Commission member Peter Wallison. "The effect was to drive down underwriting standards, which HUD had repeatedly described as its goal."

Together, the three agencies created a feeding frenzy for subprime mortgages. But "FHA was the pace car of the subprime binge," Pinto told IBD.

Now this third leg of the government stool supporting "affordable housing" is crumbling.

FHA's mortgage delinquencies, now at 17%, got so bad last year that the Obama administration extended the grace period for its loan payments.

Starting in August 2011, FHA lengthened the period for unemployed homeowners to miss mortgage payments to 12 months from three months. This allows borrowers to go without making a monthly payment for a full year before the foreclosure process begins.

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